Consumer Protection Act May Have Unintended Consequences For The Housing Market

shieldRecent real estate statistics show that home prices are trending upwards with the largest increase per year since March of 2006 – a time when the housing bubble was at its peak.  Property values soared to 12.2 percent between May 2012 and May 2013 according the S&P/Case-Shiller Home Price Index a trusted property value tracking source.   This may be explained by a number of factors, including a low inventory of houses and low borrowing costs.

However, qualifying for a mortgage will be harder in January 2014 because of the implementation of the Dodd-Frank Act. In an effort to regulate the lending industry and protect the consumer/taxpayer, Congress established the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Many of its ambitious new regulations are scheduled to go into effect January 1, 2014.

Consumer Financial Protection Bureau

As part of the Dodd-Frank Act the Consumer Financial Protection Bureau was created. This is the entity that will be watching closely over lending institutions in 2014 when the new Dodd-Frank reform becomes effective.  Ironically, in an effort to protect the consumer, these changes may also result in making it more difficult for the consumer to get a mortgage in an already tight credit environment.  In 2014 new mortgage regulations known as the ‘Qualified Mortgage Rule’ will require lenders to prove a borrower has the ability to repay a loan.

Potentially lower loan limits, a 20% or more down payment requirement and a lower debt to income ratio are other aspects of the QM rule that has industry pundits such as the National Association of REALTORS concerned that it will create continued uncertainty for potential borrowers and lenders in an already turbulent lending market.

Anticipation that larger banks with business operations outside of mortgages may reduce their mortgage operations because of risk may result in fewer lenders and mortgage options, making it harder for consumers to qualify for a mortgage. Marcus McCue, executive vice president at Guardian Mortgage, noted that 48 percent of borrowers who could get a mortgage through his bank this year will not qualify after 2014.

And, let’s not forget affordability…”Affordability has fallen to a five-year low, as home price increases easily outpaced income growth,” Lawrence Yun, chief economist for the National Association of REALTORS®, noted in a recent housing report. “Expected rising mortgage interest rates will further lower affordability in upcoming months.”

With the specter of lower affordability and stringent lending requirements, homeownership continues to be tantalizingly out of reach for many would be homeowners. It seems likely the rental market will continue to attract investors as it maintains an upward trend due to sustained demand.

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